Summary
Economic activity in the Seventh District continued to expand during November and December, though at a more modest pace than in the previous reporting period. Consumer spending continued to increase at a gradual rate. Business spending and hiring rose again. Residential construction and real estate activity continued to decline in most areas, though the declines were smaller. Nonresidential construction expanded slowly. Manufacturing activity increased at a more gradual pace than in the previous period. Household lending activity moderated further, while commercial lending was little changed. Overall, nonwage price pressures continued to ease a bit, while overall wage increases were similar as in the previous reporting period. Farmers planned to plant more corn acres and fewer soybean acres this spring, reflecting changes in relative prices.

Consumer spending
Consumer spending continued to increase at a gradual rate in November and December. Retailers said holiday sales "met expectations" and were "good, but not as strong as previous years." The most notable strength came from electronics and apparel; contacts were surprised by the apparel sales given the mild weather. Most contacts said sales in the Midwest were softer than in the rest of the country. Inventories were in line with desired levels. Vehicle dealers reported a slight pickup in sales during December. Dealers said consumers continued to favor smaller, more fuel efficient vehicles, and one added that the lack of snow was holding back demand for light trucks. Tourism in Michigan was up slightly from year ago levels.

Business spending
Business spending and hiring rose again in the District. Capital spending continued to increase at similar rates as in the previous reporting period, though one mid-sized firm reported plans to decrease capital outlays this year and a manufacturer said the bulk of their expansion plans were slated for 2008. Employment continued to increase gradually on net. Manufacturing employment was mixed by industry. Toolmakers and a heavy equipment manufacturer increased employment, while construction materials manufacturers reported they were holding steady or cutting back on shifts. One retailer said it was hiring for new stores only, while another said it was having trouble finding qualified workers. A temporary help services provider said that billable hours in the District were steady, but temp-to-perm conversions and permanent placements were strong.

Construction and real estate
Residential construction continued to fall in the District, though the declines were smaller than in the previous reporting period. Homebuilding slowed in Michigan, while one contact saw signs of a recovery in the Chicago area. Builders reported that the supply of unsold, speculative homes remained high and that showroom traffic edged down. Contacts reported steady or declining home values in many areas of the District, and one in Illinois noted that many builders were adding non-price incentives to sell new homes. Nonresidential construction expanded slowly, led by office construction in the Chicago area. Demand for office space was strong in most cities in the District; the lone exception was the Detroit area. Commercial vacancy rates were little changed, and there were no reported cancellations of projects. One contact revised up their outlook for net absorption of commercial space, reflecting lower energy prices and steady interest rates.

Manufacturing
Manufacturing activity expanded at a slower pace in late November and December than in the previous reporting period. Contacts reported particular strength in the energy, aviation, and aeronautical industries; manufacturers in many other industries were planning to scale back production in 2007 after sluggish sales at year-end led to rising inventories. Sales of large and medium sized heavy equipment for use in the energy sector were doing very well. Demand for tractors was increasing in response to high corn prices. Manufacturers of machine tools and equipment parts reported steady orders in December, even from customers in the auto sector. Inventories of finished steel at service centers have been high since the summer, but producers thought that declining imports and domestic production would bring these stocks down to desired levels by the second quarter. In contrast, a producer of specialty steel products indicated that their order books for 2007 were already filled. Production of diesel engines for over-the-road applications continued at a torrid pace through the end of the year, with an expectation of sharp reductions in output after stricter EPA emissions requirements take effect on January 1. Several manufacturers reported increasing exports, which they attributed to improving economic conditions outside the US and a lower dollar. The weakness in residential construction continued to damp sales of smaller construction equipment and wallboard.

Banking and finance
Household lending activity moderated further, while commercial lending was little changed from the previous reporting period. The number of mortgage applications for both home purchases and refinancing continued to be low, despite modest declines in mortgage rates. Demand for new home equity loans and outstanding balances declined, but the usage rate of existing credit lines ticked up. Household credit quality generally remained in good shape: though edging up a bit, delinquency rates on mortgages and home equity loans remained at healthy levels. Retail deposit growth was steady. Business lending was mixed by loan type. Asset-based lending remained steady; equipment leasing activity continued to show solid increases; and commercial real estate lending declined in the most recent month but remained up significantly from a year ago. A commercial real estate developer said there was still "lots of capital" available to buyers, and buyers were increasing the amount of leveraged financing used in purchases. Commercial lending conditions continued to be competitive and interest rate margins remained narrow.

Prices and costs
On balance, nonwage price pressures continued to ease a bit, while overall wage increases were similar to the previous reporting period. On net, raw materials prices were down slightly or little changed at high levels. However, one contractor said that volatility in materials prices has made it difficult to predict the costs of projects moving forward. Toolmakers reported further price hikes. Equipment makers announced price increases for construction machinery but were uncertain how much would stick. One contact reported declines in freight rates. Wholesale furniture prices were falling, and one retailer said they were holding back on current purchases in anticipation of further discounting. A general merchandise retailer said their promotional activities for the holidays were within normal levels. Hotel room rates were steady to up, but not enough to cover the high level of energy costs, according to one contact. Wage increases continued at similar rates as in the previous reporting period. A retailer in southeast Michigan said a statewide minimum wage hike had no impact on their wages. One contact said that salaries for executives were "vigorously competitive."

Agriculture
During the reporting period, corn prices hit the highest level in over a decade, and soybeans were higher than at anytime since August 2005; however, both prices have retreated in recent weeks. In response to relative price movements as well as a reduction in fertilizer costs for corn, farmers planned to plant more corn acres and fewer soybean acres this spring. Moisture levels were up in much of the District, and some areas were abnormally wet. Hog and cattle prices were lower. Milk prices increased, but were still below the prices of last year. Plans for expanding acreage contributed to higher rents for farmland.